Loading judgment…
Facts
The assessee, engaged in manufacturing and wind energy generation, claimed a deduction under Section 80-IA. The Assessing Officer (AO) disallowed a portion of the claimed deduction by proportionately allocating common expenses (employee benefits, directors' remuneration, administrative, and selling expenses) to the eligible unit, reducing the deduction from Rs. 2,02,73,914/- to Rs. 1,57,16,935/-. The assessee contended that these expenses were covered by an external contractor for operation and maintenance, thus not attributable to the eligible unit.
Held
The Tribunal upheld the AO's proportional allocation of most expenses, finding no infirmity in that approach. However, the specific issue regarding the allocation of 'insurance and rent, fees, rates and taxes' was restored to the AO for limited verification to determine if these expenses belonged to the eligible unit.
Key Issues
Whether the Assessing Officer was justified in proportionately allocating common expenses to the eligible unit for computing deduction under Section 80-IA, and whether specific expenses like insurance, rent, fees, rates, and taxes were correctly allocated.
Sections Cited
80-IA, 143(2), 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI RAVISH SOOD & SHRI MADHUSUDAN SAWDIA
आदेश/ORDER
PER MADHUSUDAN SAWDIA, A.M.:
This appeal is filed by M/s. Weld Fuse Pvt. Ltd. (“the assessee”), feeling aggrieved by the order passed by the Learned ADDL/JCIT (A)-1, Gurugram, (“Ld. First Appellate Authority”), dated 10.02.2025 for the A.Y. 2017-18.
The grounds of appeal of the assessee are as under :
“1) The order of the learned CIT (A) is erroneous both on facts and in law. 2) The learned CIT (A) erred in confirming the action of the A.O in appropriating head office expenses of Rs. 45,56,979/- toward WTG business and in arriving at the gross total income eligible for deduction u/s 80IA at Rs. 1,57,16,935/- as against Rs. 2,02,73,914/-. 3) Any other ground/grounds that may be urged at the time of hearing.”
The brief facts of the case are that, the assessee is a company engaged in the business of manufacturing welded mesh, poultry cages, chain link mesh and generation of wind energy by wind turbines generator. The assessee filed its return of income for the assessment year 2017–18 on 28.10.2017, admitting a total income of Rs.1,25,66,330/- after claiming deduction under section 80IA of the Income Tax Act, 1961 (“the Act”) of Rs.2,02,73,914/-. The assessee thereafter filed a revised return on 28.07.2018, admitting a total income of Rs.1,30,68,890/- after claiming the same deduction of Rs.2,02,73,914/- under section 80IA of the Act. The case of the assessee was selected for scrutiny, for which notice under section 143(2) of the Act was issued by the Learned Assessing Officer (“Ld. AO”). During the assessment proceedings, the Ld. AO noted that the assessee had claimed deduction under section 80-IA of the Act for Rs.2,02,73,914/-. The Ld. AO called for supporting documents and details from the assessee. On perusal, the Ld. AO observed that certain expenditure claimed by the assessee in the consolidated financial statement of accounts had not been allocated to the eligible unit while computing its net profit for the purpose of deduction under section 80-IA of the Act. Therefore, the Ld. AO held that the claim under section 80-IA of the Act was overstated to this extent and proceeded to allocate employee benefit expenses, directors’ remuneration and some of administrative and selling expenses to the eligible unit proportionately, based on turnover of the assessee as a whole and the turnover of the eligible unit. He accordingly restricted the deduction under section 80-IA to Rs.1,57,16,935/-. Finally, the assessment was completed under section 143(3) of the Act on 22.12.2019 determining total income of the assessee at Rs.1,76,25,866/-.
Aggrieved with the order of the Ld. AO, the assessee filed appeal before the Ld. First Appellate Authority, who upheld the action of the Ld. AO and dismissed the appeal of the assessee.
Aggrieved with the order of Ld. First Appellate Authority, the assessee is in further appeal before us. The Learned Authorised Representative (“Ld. AR”) submitted that the solitary issue in this appeal is the reduction of deduction under section 80-IA from Rs.2,02,73,914/- to Rs.1,57,16,935/-. It was contended that the assessee had entered into a contract with M/s Regen Powertech Pvt. Ltd. (“contractor”) to whom the entire work of operation and maintenance of the eligible unit was entrusted. The scope of this contract, as per clause 2 (page no. 2 of paper book No. 2), covered all relevant operational and maintenance activities. The Ld. AR argued that the expenditure alleged by the Ld. AO as not allocated to the eligible unit did not pertain to the eligible unit, since such costs were borne and managed under the contract with the contractor. Therefore, the reduction of the deduction under section 80-IA of the Act was unjustified and should be deleted.
Per contra, the Learned Departmental Representative (“Ld. DR”) supported the orders of the lower authorities and submitted that the Ld. AO had not allocated certain expenses such as export expenses, business promotion, donations, bad debts, discounts, carriage outward, loading/unloading charges, and commission expenses to the eligible unit. The Ld. AO had only allocated, on the basis of turnover, expenses under the heads employee benefits, directors’ remuneration, and some of the administrative and selling expenses, including conveyance, petrol and vehicle maintenance, telephone charges, insurance, travelling expenses, consultancy charges, rent, fees, rates and taxes, audit fees, repairs and maintenance, printing, postage and courier, festival expenses, and miscellaneous expenses. These were common to the business as a whole and the assessee had not maintained separate records to establish that these did not relate to the eligible unit. Hence, there was no infirmity in the order of the Ld. AO.
We have heard the rival submissions and gone through the material available on record. We have also gone through the profit and loss account of the eligible unit (page no.39 of the paper book no.1), note No. 16 relating to employee benefit expenses, and note No. 18 relating to administrative and selling expenses forming part of the consolidated financial statements (page nos. 12 and 13 of the paper book no.1), which are to the following effect :
On perusal of above, in our considered view, as far as employee benefit expenses and directors’ remuneration are concerned, it cannot be denied that some part of the time and services of employees and directors would relate to the eligible project. Further, as far as those part of the administrative and selling expenses, which has been allocated by the Ld. AO to the eligible unit are concerned, it cannot be denied that some expenditure has been incurred on account of the eligible project.
Moreover, no such expenses are also reflected in the profit and loss account of the eligible unit. The assessee has also not produced any documentary evidence or a suitable alternative method for allocation of such expenses to the eligible unit other than the turnover basis adopted by the Ld. AO. As far as audit fees are concerned, we find that the financial statements of the eligible unit are also audited, and no part of such audit fees has been allocated to the eligible unit by the assessee. However, as far as insurance and rent, fees, rates and taxes are concerned, we find that these have been assigned in the profit and loss account of the eligible unit as well as the consolidated profit and loss account. Therefore, the allocation of insurance and rent, fees, rates and taxes needs specific verification on the part of the Ld. AO, whether any of these expenses belongs to the eligible unit or not. Therefore, we restore this limited issue to the file of the Ld. AO to verify from supporting evidence whether any portion of such expenses belongs to the eligible unit. As far as the rest of the allocation of expenditure is concerned, we find no infirmity in the approach adopted by the Ld. AO.
In view of the above discussion, the issue relating to allocation of insurance and rent, fees, rates and taxes is restored to the file of the Ld. AO for limited verification as per our aforesaid observation. As regards the balance allocation of expenses, the action of the Ld. AO in restricting the deduction under section 80-IA is upheld.